Zimbabwe ZiG: Gold-backed currency stays stable despite risks

Zimbabwe’s gold-backed currency, ZiG, has held steady this year as adoption continues and the country’s economy improves. The USD/ZWG pair was trading at 26.22 on Thursday, inside a range it has remained at in the past few months.

Zimbabwe ZiG stable as the central bank calls it, undervalued

ZIG, a currency backed by gold and foreign currency, has become one of the most stable currencies in Africa. It started the year trading at 25.9 and has now risen slightly to 26.22. It has largely moved in a horizontal direction for the most part of the year.

In a recent statement, the head of Zimbabwe’s central bank argued that it had become highly undervalued. He estimates that it is cheap by about 50%, pointing to the improving economy and growing usage.

One potential catalyst for the Zimbabwe ZiG is that the country’s economy has made some steady recovery in the past few months. The International Monetary Fund (IMF) estimates that the economy will grow by 5% this year, helped by the agricultural sector.

For example, the critical tobacco industry is experiencing a boom, with exports rising to over 83 million kilograms by late April. At the current prices, the tobacco sales were worth over $545 million. It was a 66% surge from the same period a year earlier.

The same boom is happening in the mining industry, where the country is benefiting from the higher gold and platinum prices. While the two metals have dropped recently, they remain much higher than where they were a few years ago. 

This is benefiting the country by bringing more foreign exchange. It is also benefiting the ZiG currency that is backed by gold. Indeed, the country’s sovereign wealth fund is now raising $250 million to boost gold production to boost the economy.

The main challenge for the economy is the ongoing Iran war that has pushed energy prices much higher. ZERA, the energy regulatory authority, has boosted petrol prices, a move that has boosted inflation. 

Petrol prices have now jumped by over 50% since the war started in February. Before that, Zimbabwe’s inflation dropped to single-digits for the first time in decades.

Government plans to boost ZiG currency usage

Still, despite the stable ZiG currency, most people in Zimbabwe prefer using the US dollar. That’s because many of them, together with local businesses, have seen several Zimbabwe currencies collapse. Today, the dollar accounts for over 70% of all transactions.

The government aims to transition to ZiG in the next few years. By having a usable local currency, it hopes that the central bank will be able to intervene whenever shocks such as high inflation emerge. 

Still, the main challenge is that the government and the central bank will need to convince people and businesses about its stability. For one, officials will need to prove that they will not start printing the currency to fund the deficit.